** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington,D.C. 20549

** **

**FORM 10-Q**

** **

**(Mark One)**

**x****        ****Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 for the quarterly periodended March 31, 2006.**

**Or**

**o****           ****Transition Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 for the transition periodfrom                                               to**

 

Commission File Number **000-50266**

 

**TRINITY CAPITAL CORPORATION**

(Exact name of registrantas specified in its charter)

| **New Mexico**            |   | **85-0242376**                           |
|---------------------------|--------|------------------------------------------|
| (State of  incorporation) |   | (I.R.S. Employer  Identification Number) |

 

**1200 TrinityDrive, Los Alamos, New Mexico 87544**(Address of principalexecutive offices)

**(505) 662-5171**(Registrant’s telephonenumber, including area code)

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x No 

Indicate by check mark whether the registrant is alarge accelerated filed, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one)

| Large Accelerated Filer  o |   | Accelerated  Filer  x |   | Non-Accelerated  Filer  o |
|--------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act). o  Yes  x  No

APPLICABLE ONLY TO CORPORATEISSUERS:

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date: 6,588,717 shares of common stock, no par value, outstandingas of May 10, 2006.

 

 

----

**TRINITY CAPITALCORPORATION AND SUBSIDIARIES**
|            | ** ** | **PART I.   FINANCIAL  INFORMATION**                                              | ** ** | ** ** | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------|------------|------------|------------|
| ** ** | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** |
| Item 1.    |       | Financial  Statements                                                                       |       |       |       |
|       |       |                                                                                        |       |       |       |
| Item 2.    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       |       |       |
|       |       |                                                                                        |       |       |       |
| Item 3.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       |       |       |
|       |       |                                                                                        |       |       |       |
| Item 4.    |       | Controls and  Procedures                                                                    |       |       |       |
|       |       |                                                                                        |       |       |       |
|       |       | PART II.   OTHER  INFORMATION                                                     |       |       |       |
|       |       |                                                                                        |       |       |       |
| Item 1.    |       | Legal  Proceedings                                                                          |       |       |       |
|       |       |                                                                                        |       |       |       |
| Item 1A.   |       | Risk  Factors                                                                               |       |       |       |
|       |       |                                                                                        |       |       |       |
| Item 2.    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       |       |       |
|       |       |                                                                                        |       |       |       |
| Item 3.    |       | Defaults Upon  Senior Securities                                                            |       |       |       |
|       |       |                                                                                        |       |       |       |
| Item 4.    |       | Submission of  Matters to a Vote of Securities Holders                                      |       |       |       |
|       |       |                                                                                        |       |       |       |
| Item 5.    |       | Other Information                                                                           |       |       |       |
|       |       |                                                                                        |       |       |       |
| Item 6.    |       | Exhibits                                                                                    |       |       |       |
|       |       |                                                                                        |       |       |       |
|       |       | SIGNATURES                                                                                  |       |       |       |
|       |       |                                                                                        |       |       |       |
|       |       | CERTIFICATIONS                                                                              |       |       |       |

 

 

 

----

**PART I —FINANCIAL INFORMATION**

**Item 1. FinancialStatements**

**TRINITY CAPITALCORPORATION & SUBSIDIARIESCONSOLIDATED BALANCE SHEETSMarch 31, 2006 and December 31, 2005(Amounts in thousands, except share data)**
| ** **                                                                                                                                                                                                                                                                                                                                                 | ** ** | **March 31,  2006 ** | ** ** | **December 31,  2005 ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                 | ** ** | **(Unaudited)**                | ** ** | ** **                        | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                                 |       |                           |       |                              |       |
| Cash and due  from banks                                                                                                                                                                                                                                                                                                                                   |       | $                              | 22,194     |                              | $          | 24,547 |   |
| Interest bearing  deposits with banks                                                                                                                                                                                                                                                                                                                      |       | 3,677                          |       | 29,122                            |       |
| Federal funds  sold and securities purchased under resell agreements                                                                                                                                                                                                                                                                                       |       | 56                             |       | 1,013                             |       |
| **Cash and cash equivalents**                                                                                                                                                                                                                                                                                                                              |       | 25,927                         |       | 54,682                            |       |
| Investment  securities available for sale                                                                                                                                                                                                                                                                                                                  |       | 85,729                         |       | 91,231                            |       |
| Investment  securities held to maturity, at amortized cost (fair value of $18,331 at  March 31, 2006 and $26,565 at December 31, 2005)                                                                                                                                                                                                           |       | 18,357                         |       | 26,612                            |       |
| Other  investments                                                                                                                                                                                                                                                                                                                                         |       | 8,270                          |       | 7,965                             |       |
| Loans (net of  allowance for loan losses of $9,256 at March 31, 2006 and $8,842 at  December 31, 2005)                                                                                                                                                                                                                                           |       | 1,041,411                      |       | 1,010,538                         |       |
| Loans held for  sale                                                                                                                                                                                                                                                                                                                                       |       | 15,183                         |       | 7,588                             |       |
| Premises and  equipment, net                                                                                                                                                                                                                                                                                                                               |       | 24,096                         |       | 24,401                            |       |
| Accrued interest  receivable                                                                                                                                                                                                                                                                                                                               |       | 6,720                          |       | 7,321                             |       |
| Mortgage  servicing rights, net                                                                                                                                                                                                                                                                                                                            |       | 9,545                          |       | 9,779                             |       |
| Other real  estate owned                                                                                                                                                                                                                                                                                                                                   |       | 290                            |       | 375                               |       |
| Other assets                                                                                                                                                                                                                                                                                                                                               |       | 3,394                          |       | 3,524                             |       |
| **Total assets**                                                                                                                                                                                                                                                                                                                                           |       | $                              | 1,238,922  |                              | $          | 1,244,016 |   |
|                                                                                                                                                                                                                                                                                                                                                       |       |                           |       |                              |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                                                                                                                             |       |                           |       |                              |       |
| Liabilities                                                                                                                                                                                                                                                                                                                                                |       |                           |       |                              |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                                  |       |                           |       |                              |       |
| Noninterest bearing                                                                                                                                                                                                                                                                                                                                        |       | $                              | 91,315     |                              | $          | 79,030 |   |
| Interest bearing                                                                                                                                                                                                                                                                                                                                           |       | 947,132                        |       | 962,818                           |       |
| **Total deposits**                                                                                                                                                                                                                                                                                                                                         |       | 1,038,447                      |       | 1,041,848                         |       |
| Short-term  borrowings                                                                                                                                                                                                                                                                                                                                     |       | 16,704                         |       | 10,000                            |       |
| Long-term  borrowings                                                                                                                                                                                                                                                                                                                                      |       | 63,628                         |       | 72,306                            |       |
| Junior  subordinated debt owed to unconsolidated trusts                                                                                                                                                                                                                                                                                                    |       | 32,992                         |       | 32,992                            |       |
| Borrowings made  by Employee Stock Ownership Plan (ESOP) to outside parties                                                                                                                                                                                                                                                                                |       | 743                            |       | 1,214                             |       |
| Accrued interest  payable                                                                                                                                                                                                                                                                                                                                  |       | 4,086                          |       | 4,047                             |       |
| Other  liabilities                                                                                                                                                                                                                                                                                                                                         |       | 3,991                          |       | 5,991                             |       |
| **Total liabilities**                                                                                                                                                                                                                                                                                                                                      |       | 1,160,591                      |       | 1,168,398                         |       |
| Stock owned by  Employee Stock Ownership Plan (ESOP) participants; 629,327 shares and  614,558 shares at March 31, 2006 and December 31, 2005,  respectively, at fair value; net of unearned ESOP shares of  45,697 shares and 72,243 shares at March 31, 2006 and  December 31, 2005, respectively, at historical cost |       | 16,008                         |       | 16,100                            |       |
| Commitments and  contingencies (Note 8)                                                                                                                                                                                                                                                                                                                    |       |                           |       |                              |       |
| Stockholders’ equity                                                                                                                                                                                                                                                                                                                                  |       |                           |       |                              |       |
| Common stock, no par, authorized  20,000,000 shares; issued 6,856,800 shares, shares outstanding  6,588,717 and 6,554,559 at March 31, 2006 and December 31, 2005, respectively                                                                                                                                                        |       | 6,836                          |       | 6,836                             |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                 |       | 957                            |       | 922                               |       |
| Retained earnings                                                                                                                                                                                                                                                                                                                                          |       | 60,644                         |       | 58,013                            |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                                       |       | (321                           | )          | (273                              | )          |
| Total stockholders’ equity before treasury stock                                                                                                                                                                                                                                                                                                      |       | 68,116                         |       | 65,498                            |       |
| Treasury stock,  at cost, 222,386 shares and 229,998 shares at March 31, 2006 and  December 31, 2005, respectively                                                                                                                                                                                                                          |       | (5,793                         | )          | (5,980                            | )          |
| **Total stockholders’ equity**                                                                                                                                                                                                                                                                                                                        |       | 62,323                         |       | 59,518                            |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                                                                                                                                                        |       | $                              | 1,238,922  |                              | $          | 1,244,016 |   |

 

The accompanying notesare an integral part of these unaudited consolidated financial statements.

1

----

**TRINITY CAPITALCORPORATION & SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFor the Three Months Ended March 31, 2006 and 2005(Amounts in thousands except share and per share data)(Unaudited)**
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
|                                                     |       |                             |       |   |   |
| Interest income:                                         |       |                             |       |   |   |
| Loans, including fees                                    |       | $                                | 17,903     |   | $ | 14,222 |   |
| Investment  securities:                                  |       |                             |       |   |   |
| Taxable                                                  |       | 991                              |       | 656 |   |
| Nontaxable                                               |       | 203                              |       | 180 |   |
| Federal funds sold and repurchase agreements             |       | 3                                |       | 4 |   |
| Other interest bearing deposits                          |       | 132                              |       | 20 |   |
| Investment in unconsolidated trusts                      |       | 22                               |       | 16 |   |
| **Total interest income**                                |       | 19,254                           |       | 15,098 |   |
| Interest expense:                                        |       |                             |       |   |   |
| Deposits                                                 |       | 6,542                            |       | 3,981 |   |
| Short-term borrowings                                    |       | 138                              |       | 102 |   |
| Long-term borrowings                                     |       | 680                              |       | 577 |   |
| Junior subordinated debt owed to unconsolidated  trusts  |       | 728                              |       | 519 |   |
| **Total interest expense**                               |       | 8,088                            |       | 5,179 |   |
| **Net  interest income**                                 |       | 11,166                           |       | 9,919 |   |
| Provision for  loan losses                               |       | 1,900                            |       | 525 |   |
| **Net interest income after provision for loan  losses** |       | 9,266                            |       | 9,394 |   |
| Other income:                                            |       |                             |       |   |   |
| Mortgage loan servicing fees                             |       | 640                              |       | 602 |   |
| Loan and other fees                                      |       | 709                              |       | 588 |   |
| Service charges on deposits                              |       | 381                              |       | 331 |   |
| Gain on sale of loans                                    |       | 300                              |       | 463 |   |
| Other operating income                                   |       | 366                              |       | 76 |   |
|                                                     |       | 2,396                            |       | 2,060 |   |
| Other expenses:                                          |       |                             |       |   |   |
| Salaries and employee benefits                           |       | 4,425                            |       | 4,058 |   |
| Occupancy                                                |       | 857                              |       | 799 |   |
| Data processing                                          |       | 468                              |       | 490 |   |
| Marketing                                                |       | 437                              |       | 324 |   |
| Amortization and valuation of mortgage servicing  rights |       | 551                              |       | 130 |   |
| Supplies                                                 |       | 201                              |       | 209 |   |
| Loss on sale of other real estate owned                  |       | 198                              |       | 518 |   |
| Postage                                                  |       | 157                              |       | 170 |   |
| Other                                                    |       | 1,099                            |       | 960 |   |
|                                                     |       | 8,393                            |       | 7,658 |   |
| **Income before income taxes**                           |       | 3,269                            |       | 3,796 |   |
| Income taxes                                             |       | 1,168                            |       | 1,428 |   |
| **Net income**                                           |       | $                                | 2,101      |   | $ | 2,368 |   |
| Basic earnings  per common share                         |       | $                                | 0.32       |   | $ | 0.35 |   |
| Diluted earnings per  common share                       |       | $                                | 0.32       |   | $ | 0.35 |   |

 

The accompanying notes are anintegral part of these unaudited consolidated financial statements.

2

----

**TRINITY CAPITALCORPORATION & SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Three Months Ended March 31, 2006 and 2005(Amounts in thousands)(Unaudited)**
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005** | ** ** |
|                                                                                         |       |                             |       |   |   |
| Cash Flows From  Operating Activities                                                        |       |                             |       |   |   |
| Net income                                                                                   |       | $                                | 2,101      |   | $ | 2,368 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                                |       | 655                              |       | 631 |   |
| Net amortization  of:                                                                        |       |                             |       |   |   |
| Mortgage servicing rights                                                                    |       | 674                              |       | 694 |   |
| Premiums and discounts on investment securities                                              |       | (40                              | )          | 293 |   |
| Junior subordinated debt owed to unconsolidated  trusts issuance costs                       |       | 5                                |       | 5 |   |
| Provision for loan losses                                                                    |       | 1,900                            |       | 525 |   |
| Change in mortgage servicing rights valuation  allowance                                     |       | (123                             | )          | (564 | ) |
| Loss on sale or disposal of premises and equipment                                           |       | —                           |       | 143 |   |
| Federal Home Loan Bank (FHLB) stock dividends  received                                      |       | (59                              | )          | (41 | ) |
| Gain on sale of loans                                                                        |       | (300                             | )          | (463 | ) |
| (Gain) Loss on disposal of other real estate owned                                           |       | (15                              | )          | 211 |   |
| Write-down of value of other real estate owned                                               |       | 40                               |       | 307 |   |
| Decrease (increase) in other assets                                                          |       | 726                              |       | (1,082 | ) |
| Increase in other liabilities                                                                |       | 341                              |       | 1,005 |   |
| Release of Employee Stock Ownership Plan (ESOP)  shares                                      |       | 573                              |       | 606 |   |
| **Net cash provided by operating activities before  originations and gross sales of loans**  |       | 6,478                            |       | 4,638 |   |
| Gross sales of  loans held for sale                                                          |       | 29,950                           |       | 38,581 |   |
| Origination of  loans held for sale                                                          |       | (37,562                          | )          | (38,190 | ) |
| **Net cash (used in) provided by operating  activities**                                     |       | (1,134                           | )          | 5,029 |   |
| Cash Flows From  Investing Activities                                                        |       |                             |       |   |   |
| Proceeds from maturities and paydowns of investment  securities available for sale           |       | 5,490                            |       | 2,025 |   |
| Proceeds from maturities and paydowns of investment  securities held to maturity             |       | 8,213                            |       | 9,106 |   |
| Proceeds from maturities and paydowns of investment  securities, other                       |       | —                           |       | 325 |   |
| Purchase of investment securities, other                                                     |       | (246                             | )          | (125 | ) |
| Proceeds from sale of other real estate owned                                                |       | 60                               |       | 2,872 |   |
| Loans funded, net of repayments                                                              |       | (32,773                          | )          | (40,084 | ) |
| Purchases of premises and equipment                                                          |       | (350                             | )          | (198 | ) |
| Proceeds from sale of premises and equipment                                                 |       | —                           |       | 100 |   |
| **Net cash used in investing activities**                                                    |       | (19,606                          | )          | (25,979 | ) |
| Cash Flows From  Financing Activities                                                        |       |                             |       |   |   |
| Net increase in demand deposits, NOW accounts and  savings accounts                          |       | 8,451                            |       | 33,558 |   |
| Net (decrease) increase in time deposits                                                     |       | (11,852                          | )          | 47,950 |   |
| Proceeds from issuances of borrowings                                                        |       | —                           |       | 20,000 |   |
| Repayment of borrowings                                                                      |       | (1,974                           | )          | (36,295 | ) |
| Repayment of ESOP debt                                                                       |       | (471                             | )          | (472 | ) |
| Purchase of treasury stock                                                                   |       | (285                             | )          | (4,000 | ) |
| Issuance of common stock for stock option plan                                               |       | 258                              |       | — |   |
| Dividend payments                                                                            |       | (2,256                           | )          | (2,049 | ) |
| Tax benefit recognized for exercise of stock options                                         |       | 114                              |       | — |   |
| **Net cash (used in) provided by financing  activities**                                     |       | (8,015                           | )          | 58,692 |   |
| **Net (decrease) increase in cash and cash  equivalents**                                    |       | $                                | (28,755    | ) | $ | 37,742 |   |
| Cash and cash  equivalents:                                                                  |       |                             |       |   |   |
| Beginning of year                                                                            |       | 54,682                           |       | 23,814 |   |
| End of period                                                                                |       | $                                | 25,927     |   | $ | 61,556 |   |
| Supplemental  Disclosures of Cash Flow Information                                           |       |                             |       |   |   |
| Cash payments  (receipts) for:                                                               |       |                             |       |   |   |
| Interest                                                                                     |       | $                                | 8,049      |   | $ | 5,113 |   |
| Income taxes                                                                                 |       | (155                             | )          | 404 |   |
| Non-cash  investing and financing activities:                                                |       |                             |       |   |   |
| Transfers from loans to other real estate owned                                              |       | —                           |       | 475 |   |
| Change in  unrealized (loss) gain on investment securities, net of taxes                     |       | (48                              | )          | (111 | ) |

 

The accompanying notes are an integral part of theseunaudited consolidated financial statements.

 

3

----

**TRINITY CAPITALCORPORATION & SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**Note 1. Basis of Presentation**

               The accompanying unaudited consolidated financial statements include theconsolidated balances and results of operations of Trinity Capital Corporation(“Trinity”) and its wholly owned subsidiaries: Los Alamos National Bank (the “Bank”)and Title Guaranty & Insurance Company (“Title Guaranty”), TCCAppraisal Services Corporation (“TCC Appraisal”), TCC Advisors Corporation (“TCCAdvisors”) and TCC Funds, collectively referred to as the “Company.” Trinity Capital Trust I (“Trust I”), Trinity Capital Trust II (“Trust II”),Trinity Capital Trust III (“Trust III”) and Trinity Capital Trust IV (“Trust IV”),collectively referred to as the “Trusts,” are trust subsidiaries of Trinity butare not consolidated in these financial statements (see “Consolidation”accounting policy below). The business activities of the Company consist solelyof the operations of its wholly owned subsidiaries. All significantinter-company balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments(consisting only of normal recurring adjustments) necessary for a fairpresentation of the financial position, results of operations and cash flowsfor the interim periods have been made. The results of operations for the threemonths ended March 31, 2006 are not necessarily indicative of the resultsto be expected for the entire fiscal year.

               The unaudited consolidated interim financial statements have been prepared inconformity with accounting principles generally accepted in the United Statesof America and industry practice. Certain information in footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America andindustry practice has been condensed or omitted pursuant to rules andregulations of the Securities and Exchange Commission. These financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s December 31, 2005audited financial statements filed on Form 10-K.

               The preparation of financial statements in conformity with accountingprincipals generally accepted in the United States of America requiresmanagement to make estimates and assumptions which affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesas of the date of the financial statements, as well as the reported amounts ofincome and expenses during the reported periods. Actual results could differfrom those estimates.

**Note 2. Comprehensive Income**

               Comprehensive income includes net income, as well as the change in netunrealized (loss) gain on investment securities available for sale, net of tax.Comprehensive income was $2.1 million and $2.3 million for the three monthperiods ended March 31, 2006 and 2005, respectively.

**Note 3. Earnings Per Share Data**

               The following table sets forth the computation of basic and diluted earningsper share for the periods indicated:
| ** **                                                                         | ** ** | **Three Months Ended March 31,**                                                             | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                                                                                         | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited; In thousands except   for share and per share data)** | ** ** |
| Net income                                                                         |       | $                                                                                                                | 2,101      |   | $ | 2,368 |   |
| Weighted average  common shares issued                                             |       | 6,856,800                                                                                                        |       | 6,856,800 |   |
| LESS: Weighted  average treasury stock shares                                      |       | (224,268                                                                                                         | )          | (99,238 | ) |
| LESS: Weighted  average unearned Employee Stock Ownership Plan (ESOP) stock shares |       | (51,122                                                                                                          | )          | (78,619 | ) |
| Weighted average  common shares outstanding, net                                   |       | 6,581,410                                                                                                        |       | 6,678,943 |   |
| Basic earnings  per common share                                                   |       | $                                                                                                                | 0.32       |   | $ | 0.35 |   |
| Weighted average  dilutive shares from stock option plan                           |       | 39,289                                                                                                           |       | 98,879 |   |
| Weighted average  common shares outstanding including dilutive shares              |       | 6,620,699                                                                                                        |       | 6,777,822 |   |
| Diluted earnings per  common share                                                 |       | $                                                                                                                | 0.32       |   | $ | 0.35 |   |

 

4

----

**Note 4. Recent Accounting Pronouncementsand Regulatory Developments**

In December 2004, the FASB issued SFAS No. 123R,*Share-Based Payment*, which is anAmendment of FASB Statement Nos. 123 and 95. SFAS No. 123R changes, amongother things, the manner in which share-based compensation, such as stockoptions and restricted stock awards, will be accounted for by both public andnon-public companies. For public companies, the cost of employee servicesreceived in exchange for equity instruments including options and restrictedstock awards generally will be measured at fair value at the grant date. Thegrant date fair value will be estimated using option-pricing models adjustedfor the unique characteristics of those options and instruments, unlessobservable market prices for the same or similar options are available. Thecost will be recognized over the requisite service period, often the vestingperiod.

The changes in accounting replaced the existingrequirements under SFAS No. 123, *Accountingfor Stock-Based Compensation*, and will eliminate the ability toaccount for share-based compensation transactions using APB Opinion No. 25,*Accounting for Stock Issued to Employees*,which does not require companies to expense options if the exercise price isequal to the trading price at the date of grant. The accounting for similartransactions involving parties other than employees or the accounting foremployee stock ownership plans that are subject to AICPA Statement of Position93-6, *Employers’ Accounting forEmployee Stock Ownership Plans*, would remain unchanged. See Note 12below for the Company’s current application of SFAS No. 123.

On April 14, 2005, the Securities and ExchangeCommission (“SEC”) announced the adoption of a new rule that amended thecompliance dates for SFAS No. 123R. Under SFAS No. 123R, the Companywould have been required to implement the standard as of the beginning of thefirst interim period that begins after June 15, 2005. The SEC’s new rule allowedcompanies to implement SFAS No. 123R at the beginning of their next fiscalyear (beginning January 1, 2006, in the case of the Company), instead ofthe next reporting period that begins after June 15, 2005. The SEC’s new rule didnot change the accounting required by SFAS No. 123R; it changed only thedates for compliance with the standard. The adoption of this standard decreasedearnings for the Company by approximately $73 thousand during the first threemonths of 2006, and is projected to decrease income approximately $293 thousandfor the entire year of 2006. The exact impact for 2006 and in the yearsfollowing will be dependent upon stock options granted, the estimated value ofthese options and the vesting terms for the options granted.

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*,which provides guidance on the accounting for and reporting of accountingchanges and error corrections. It establishes, unless impracticable,retrospective application as the required method for reporting a change inaccounting principle in the absence of explicit transition requirementsspecific to the newly adopted accounting principle. The reporting of acorrection of an error by restating previously issued financial statements isalso addressed by this statement. SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. Management does not believe that this statement will have a materialimpact on the Company’s financial statements.

In February 2006, the FASB issued SFAS No. 155,*Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140*.This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1,“Application of Statement 133 to Beneficial Interests in Securitized FinancialAssets.”*** ***ThisStatement eliminates the exemption from applying Statement 133 to interests insecuritized financial assets so that similar instruments are accounted forsimilarly regardless of the form of the instruments. This Statement alsoimproves financial reporting by allowing a preparer to elect fair valuemeasurement at acquisition, at issuance, or when a previously recognizedfinancial instrument is subject to a remeasurement (new basis) event, on aninstrument-by-instrument basis, in cases in which a derivative would otherwisehave to be bifurcated. Providing a fair value measurement election also resultsin more financial instruments being measured at what the Board regards as themost relevant attribute for financial instruments, fair value. This Statementis effective for all financial instruments acquired or issued after thebeginning of an entity’s first fiscal year that begins after September 15,2006. Management does not believe that this statement will have a materialimpact on the Company’s financial statements.

In March 2006, the FASB issued SFAS No. 156, *Accounting for Servicing of Financial Assets*.The new Standard, which is an amendment to SFAS No. 140, **Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities—areplacement of FASB Statement No. 125**, will simplify theaccounting for servicing assets and liabilities, such as those common withmortgage securitization activities. Specifically, the new Standard addressesthe recognition and measurement of separately recognized servicing assets andliabilities and provides an approach to simplify efforts to obtain hedge-like(offset) accounting. The standard also: (1) clarifies when an obligation to servicefinancial assets should be separately recognized as a servicing asset or aservicing liability; (2) requires that a separately recognized servicingasset or servicing liability be initially measured at fair value, ifpracticable; (3) permits an entity with a separately recognized servicingasset or servicing liability to choose either the amortization method or thefair value method for subsequent measurement. FAS No. 156 permits aservicer that uses derivative financial instruments to offset risks onservicing to report both the derivative financial instrument and relatedservicing asset or liability by using a consistent measurement attribute — fairvalue. This Statement is effective for all financial instruments acquired orissued after the beginning of an entity’s first fiscal year that begins after September 15,2006. Management has not yet determined which method to adopt under thisstandard, and the estimated impact on the Company’s financial statements is notyet known.

5

----

**Note 5. StockOption Plan**

The Company has the 1998 Stock Option Plan and the2005 Stock Incentive Plan created for the benefit of key management and selectemployees. Under the 1998 Stock Option Plan, 400,000 shares (as adjustedfor the stock split of December 19, 2002) from shares held in treasury orauthorized but unissued common stock are reserved for granting options. Underthe 2005 Stock Incentive Plan, 500,000 shares from shares held in treasury orauthorized but unissued common stock are reserved for granting stock-basedincentive awards. Both of these plans were approved by the Company’sshareholders. The Board of Directors determines vesting and pricing of theawards. All stock options granted through December 31, 2005 were grantedat or above the fair value of the stock at the date of the grant, vest overthree years and must be exercised within ten years of and pricing the date ofgrant. Stock appreciation rights granted after December 31, 2005 were alsogranted at or above the fair value of the stock at the date of the grant, vestover five years and must be exercised within five years of and pricing the dateof and pricing the date of grant.

Effective January 1, 2006, the Company adoptedSFAS No. 123(R), *Share-Based Payment*,which is an Amendment of FASB Statement Nos. 123 and 95. The Company adoptedthis standard using the modified prospective transaction method. Prior to theadoption of SFAS 123(R), the Company measured stock-based compensation cost inaccordance with the methods prescribed in Accounting Principles Board (APB)Opinion No. 25, *Accounting for StockIssued to Employees*. Accordingly, no compensation cost wasrecognized for options granted and vested before January 1, 2006.

Under the provisions of SFAS 123(R), the Company isrequired to recognize compensation expense for share-based compensation thatvest after adoption of the new standard. The Company uses a Black-Sholes modelto value the stock options on the date of the grant, and recognizes thisexpense over the remaining vesting term for the stock options or stockappreciation rights. Key assumptions used in this valuation method (detailedbelow) are the volatility of the Company’s stock price, a risk-free rate ofreturn (using the U.S. Treasury yield curve) based on the expected term fromgrant date to exercise date and an annual dividend rate based upon the currentmarket price. Expected term from grant date is based upon the historical timefrom grant to exercise experienced by the Company. Because share-basedcompensation vesting in the current periods were granted on a variety of dates,the assumptions are presented as ranges in those assumptions.

The following tabledetails the assumptions used in by the Black-Sholes model for share-basedcompensation granted:
| ** **                | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Stock price  volatility   |       | 14.12                                                | %          | — |   |
| Risk-free rate            |       | 4.35                                                 | %          | — |   |
| Expected  dividends       |       | 2.29                                                 | %          | — |   |
| Expected term (in  years) |       | 5                                                    |       | — |   |

 

A summary of stock optionand stock appreciation right activity under the plans as of March 31,2006, and changes during the first three months of the year is presented below:

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining Contractual  Term in years** | ** ** | **Aggregate Intrinsic  Value (in thousands)** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Outstanding at  January 1, 2006 |       | 333,117    |       | $                                         | 23.15      |                                                            |       |                                                         |       |   |
| Granted                              |       | 84,000     |       | 28.00                                     |       |                                                            |       |                                                         |       |
| Exercised                            |       | (18,178    | )          | 10.25                                     |       |                                                            |       |                                                         |       |
| Forfeited or  expired                |       | —     |       | —                                    |       |                                                            |       |                                                         |       |
| Outstanding at  March 31, 2006  |       | 398,939    |       | $                                         | 24.76      |                                                            | 6.08       |                                                         | $          | 1,735 |   |
| Exerciseable at  March 31, 2006 |       | 233,939    |       | $                                         | 21.48      |                                                            | 1.38       |                                                         | $          | 953 |   |

 

The weighted-average grant-date fair value of optionsgranted during the three months ending March 31, 2006 was $4.33. The totalintrinsic value of options exercised during the three months ended March 31,2006 was $21 thousand.

6

----

As of March 31, 2006, there was $782 thousand oftotal unrecognized compensation cost related to nonvested share-basedcompensation arrangements granted under the plans. That cost is expected to berecognized over a weighted-average vesting period of 4.0 years. There were noshares vested during the three months ending March 31, 2006. However,shares that will vest in August and December, 2006 have been ratablyexpensed in the amount of $73 thousand in the first three months of 2006.

The following pro forma information presents netincome and earnings per share had the fair value medthod of SFAS No. 123been used to measure compensation cost for stock option plans in the firstquarter of 2005.
| ** **                                                                                                                                    | ** ** | **Three Months  Ended March 31,  2005**        | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **(In thousands,  except per share  amounts)** | ** ** |
| Net income as reported                                                                                                                        |       | $                                                             | 2,368      |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 28                                                            |       |
| Pro forma net income                                                                                                                          |       | $                                                             | 2,340      |   |
| Earnings per share:                                                                                                                           |       |                                                          |       |
| Basic — as reported                                                                                                                      |       | $                                                             | 0.35       |   |
| Basic — pro forma                                                                                                                        |       | $                                                             | 0.35       |   |
| Diluted — as reported                                                                                                                    |       | $                                                             | 0.35       |   |
| Diluted — pro forma                                                                                                                      |       | $                                                             | 0.35       |   |

 

**Note 6. Short Term Borrowings**

               The Company had $16.7 million in borrowings with maturities of less than oneyear as of March 31, 2006. As of December 31, 2005, the Company hadFederal Home Loan Bank advances with maturities of less than one year of $10.0million.

**Note 7. Long Term Borrowings**

               The Company had Federal Home Loan Bank advances with maturity dates greaterthan one year of $63.6 million and $72.3 million as of March 31, 2006 and December 31,2005, respectively. As of March 31, 2006, the advances have fixed interestrates ranging from 3.22% to 6.34%.

7

----

**Note 8. Junior Subordinated DebtOwed to Unconsolidated Trusts**

The following tablepresents details on the junior subordinated debt owed to unconsolidated trustsas of March 31, 2006:
| ** **                                                  | ** ** | **Trust I**                     | ** ** | **Trust II**      | ** ** | **Trust III**     | ** ** | **Trust IV**      | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Date of issue                                               |       | March 23, 2000                  |       | November 28, 2001 |       | May 11, 2004      |       | June 29, 2005     |       |
| Amount of trust  preferred securities issued           |       | $                                    | 10,000     |                   | $          | 6,000                  |       | $                      | 6,000      |   | $ | 10,000 |   |
| Rate on trust  preferred securities                         |       | 10.875                               | %          | 9.95                   | %          | 7.52% (variable        | )          | 6.88                   | %          |
| Maturity                                                    |       | March 8, 2030                   |       | December 8, 2031  |       | September 8, 2034 |       | November 23, 2035 |       |
| Date of first  redemption                                   |       | March 8, 2010                   |       | December 8, 2006  |       | September 8, 2009 |       | August 23, 2010   |       |
| Common equity  securities issued                            |       | $                                    | 310        |                   | $          | 186                    |       | $                      | 186        |   | $ | 310 |   |
| Junior  subordinated deferrable interest debentures owed    |       | $                                    | 10,310     |                   | $          | 6,186                  |       | $                      | 6,186      |   | $ | 10,310 |   |
| Rate on junior  subordinated deferrable interest debentures |       | 10.875                               | %          | 9.95                   | %          | 7.52% (variable)       |       | 6.88                   | %          |

 

 On the dates of issue indicated above, theTrusts, being Delaware statutory business trusts, issued trust preferredsecurities (the “trust preferred securities”) in the amount and at the rateindicated above. These securities represent preferred beneficial interests inthe assets of the Trusts. The trust preferred securities will mature on thedates indicated, and are redeemable in whole or in part at the option of theCompany at any time after the date of first redemption indicated above, withthe approval of the Federal Reserve Board and in whole at any time upon theoccurrence of certain events affecting their tax or regulatory capitaltreatment. The Trusts also issued common equity securities to Trinity in theamounts indicated above. The Trusts used the proceeds of the offerings of thetrust preferred securities to purchase junior subordinated deferrable interestdebentures (the “debentures”) issued by the Company, which have termssubstantially similar to the trust preferred securities. The Company has theright to defer payments of interest on the debentures at any time or from timeto time for a period of up to ten consecutive semi-annual periods with respectto each interest payment deferred. Under the terms of the debentures, undercertain circumstances of default or the Company has elected to defer intereston the debentures, the Company may not, with certain exceptions, declare or payany dividends or distributions on its capital stock or purchase or acquire anyof its capital stock. The Company used the majority of the proceeds from thesale of the debentures to add to Tier 1 or Tier 2 capital in order to supportits growth and to purchase treasury stock.

8

----

Trinity owns all of the outstanding common securitiesof the Trusts. The Trusts are considered variable interest entities (“VIEs”)under *Financial Accounting Standards BoardInterpretation (“FIN”) No. 46, “Consolidation of Variable InterestEntities, an interpretation of Accounting Research Bulletin No. 51”*,as revised. Prior to FIN 46, VIEs were generally consolidated by an enterprisewhen the enterprise had a controlling financial interest through ownership of amajority of voting interest in the entity. Under FIN 46, a VIE should beconsolidated by its primary beneficiary. The Company implemented FIN 46 duringthe fourth quarter of 2003. Because Trinity is not the primary beneficiary ofthe Trusts, the financial statements of the Trusts are no longer included inthe consolidated financial statements of the Company. The Company’s priorfinancial statements have been reclassified to de-consolidate the Company’sinvestment in the Trusts.

In March 2005, the Board of Governors of theFederal Reserve System issued a final rule allowing bank holding companiesto continue to include qualifying trust preferred securities in their Tier 1Capital for regulatory capital purposes, subject to a 25% limitation to allcore (“Tier I”) capital elements, net of goodwill less any associated deferredtax liability. The final rule provides a five-year transition period,ending March 31, 2009, for application of the aforementioned quantitativelimitation. As of March 31, 2006, 81.6% of the trust preferred securitiesnoted in the table above qualified as Tier I capital and 18.4% qualified asTier 2 capital under the final rule adopted in March 2005.

Payments of distributions on the trust preferredsecurities and payments on redemption of the trust preferred securities areguaranteed by the Company on a limited basis. The Company also entered into anagreement as to expenses and liabilities with the Trusts pursuant to which itagreed, on a subordinated basis, to pay any costs, expenses or liabilities ofthe Trusts other than those arising under the trust preferred securities. Theobligations of the Company under the junior subordinated debentures, therelated indenture, the trust agreement establishing the Trusts, the guaranteeand the agreement as to expenses and liabilities, in the aggregate, constitutea full and unconditional guarantee by the Company of the Trusts’ obligationsunder the trust preferred securities.

Issuance costs of $615 thousand related to the firstthree trust preferred securities were deferred and are being amortized over theperiod until mandatory redemption of the securities in March 2030, December 2031and September 2034, respectively. During each of the three months ended March 31,2006 and March 31, 2005, $5 thousand of these issuance costs wereamortized. Unamortized issuance costs were $513 thousand and $519 thousand at March 31,2006 and December 31, 2005, respectively. There were no issuance costs associated with the fourth trust preferredsecurity issue.

Dividends accrued and unpaid to securities holderstotaled $369 thousand and $286 thousand on March 31, 2006 and March 31,2005, respectively.

**Note 9. Commitments, Contingenciesand Off-Balance Sheet Activities**

               *Credit-related financial instruments:* The Company is a party to credit-related commitments with off-balance-sheetrisk in the normal course of business to meet the financing needs of itscustomers. These credit-related commitments include commitments to extendcredit, standby letters of credit and commercial letters of credit. Suchcredit-related commitments involve, to varying degrees, elements of credit andinterest rate risk in excess of the amount recognized in the consolidatedbalance sheets.

               The Company’s exposure to credit loss is represented by the contractual amountof these credit-related commitments. The Company follows the same creditpolicies in making credit-related commitments as it does for on-balance-sheetinstruments.

               At March 31, 2006 and December 31, 2005, the following credit-relatedcommitments were outstanding whose contract amounts represent credit risk:

 
| ** **                                  | ** ** | **Contract Amount** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
| ** **                                  | ** ** | **(In thousands)**  | ** ** |
| Unfunded commitments  under lines of credit |       | $                        | 198,140    |   | $ | 182,641 |   |
| Commercial and standby  letters of credit   |       | 40,321                   |       | 37,436 |   |
|                                             |            |                          |            |  |  |  |  |

 

9

----

               Commitments to extend credit are agreements to lend to a customer as long asthere is no violation of any condition established in the contract. Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire a payment of a fee. The commitments for equity lines of credit mayexpire without being drawn upon. Therefore, the total commitment amounts do notnecessarily represent future cash requirements. The amount of collateralobtained, if it is deemed necessary by the Company, is based on management’scredit evaluation of the customer. Unfunded commitments under commercial linesof credit, revolving credit lines and overdraft protection agreements arecommitments for possible future extensions of credit to existing customers. Overdraftprotection agreements are uncollateralized, but most other unfunded commitmentshave collateral. These unfunded lines of credit usually do not contain aspecified maturity date and may not necessarily be drawn upon to the totalextent to which the Company is committed.

               Commercial and standby letters of credit are conditional credit-relatedcommitments issued by the Company to guarantee the performance of a customer toa third party. Those letters of credit are primarily issued to support publicand private borrowing arrangements. Essentially all letters of credit issuedhave expiration dates within one year. The credit risk involved in issuingletters of credit is the same as that involved in extending loans to customers.The Company generally holds collateral supporting those credit-relatedcommitments, if deemed necessary. In the event the customer does not perform inaccordance with the terms of the agreement with the third party, the Companywould be required to fund the credit-related commitment. The maximum potentialamount of future payments the Company could be required to make is representedby the contractual amount shown in the summary above. If the credit-relatedcommitment is funded, the Company would be entitled to seek recovery from thecustomer. At March 31, 2006 and December 31, 2005, no amounts havebeen recorded as liabilities for the Company’s potential obligations underthese credit-related commitments. The fair value of these credit-relatedcommitments is approximately equal to the fees collected when granting theseletters of credit. These fees collected were $94 thousand and $33 thousand asof March 31, 2006 and December 31, 2005, respectively, and areincluded in “other liabilities” on the Company’s balance sheets.

               *Concentrations of credit risk:* The majority of the loans, commitments to extend credit, and standby letters ofcredit have been granted to customers in Los Alamos, Santa Fe and surroundingcommunities. Although the Company has a diversified loan portfolio, asubstantial portion of its loans are made to businesses and individualsassociated with, or employed by, Los Alamos National Laboratory (“theLaboratory”). The ability of such borrowers to honor their contracts ispredominately dependent upon the continued operation and funding of theLaboratory. Investments in securities issued by states and political subdivisionsinvolve governmental entities within the State of New Mexico. The distributionof commitments to extend credit approximates the distribution of loansoutstanding. Standby letters of credit were granted primarily to commercialborrowers.

               *Contingencies:*  In thenormal course of business, the Company is involved in various legal proceedings.In the opinion of management, after consulting with counsel, probableliabilities resulting from such proceedings would not have a material adverseeffect on the Company’s consolidated financial statements.

10

----

**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

               *This discussion is intended to focus oncertain financial information regarding the Company and its subsidiaries and iswritten to provide the reader with a more thorough understanding of itsfinancial statements. The following discussion and analysis of the Company’sfinancial position and results of operations should be read in conjunction withthe information set forth in Item 3, Quantitative and QualitativeDisclosures about Market Risk and the annual audited consolidated financialstatements filed on Form 10-K.*

**Special Note Concerning Forward-Looking Statements**

This document (includinginformation incorporated by reference) contains, and future oral and writtenstatements of the Company and its management may contain, forward-lookingstatements, within the meaning of such term in the Private SecuritiesLitigation Reform Act of 1995, with respect to the financial condition, resultsof operations, plans, objectives, future performance and business of theCompany. Forward-looking statements, which may be based upon beliefs,expectations and assumptions of the Company’s management and on informationcurrently available to management, are generally identifiable by the use ofwords such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,”“will,” “would,” “could,” “should” or other similar expressions. Additionally,all statements in this document, including forward-looking statements, speakonly as of the date they are made, and the Company undertakes no obligation toupdate any statement in light of new information or future events.

The Company’s ability to predict results or the actualeffect of future plans or strategies is inherently uncertain. The factors,which could have a material adverse effect on the operations and futureprospects of the Company and its subsidiaries are detailed in the “Risk Factors”section included under Item 1A of Part II of the Company’s Form 10-Kfor the fiscal year ended December 31, 2005. In addition to the riskfactors described in that section, there are other factors that may impact anypublic company, including ours, which could have a material adverse effect onthe operations and future prospects of the Company and its subsidiaries. Theseadditional factors include, but are not limited to, the following:

•      Theeconomic impact of past and any future terrorist attacks, acts of war orthreats thereof and the response of the United States to any such threats andattacks.

•      Thecosts, effects and outcomes of existing or future litigation.

•      Consumerspending and savings habits which may change in a manner that affects our businessadversely.

•      Changesin accounting policies and practices, as may be adopted by state and federalregulatory agencies, the Financial Accounting Standards Board, the Securitiesand Exchange Commission and the Public Company Accounting Oversight Board.

•      Theability of the Company to manage the risks associated with the foregoing aswell as anticipated.

These risks and uncertainties should be considered inevaluating forward-looking statements and undue reliance should not be placedon such statements.

**Critical Accounting Policies**

***Allowance for LoanLosses:***  Management believes the allowance for loanlosses accounting policy is critical to the portrayal and understanding of ourfinancial condition and results of operations. As such, selection andapplication of this “critical accounting policy” involves judgments, estimates,and uncertainties that are susceptible to change. In the event that differentassumptions or conditions were to prevail, and depending upon the severity ofsuch changes, the possibility of materially different financial condition orresults of operations is a reasonable likelihood.

The allowance for loan losses is maintained at anamount that management believes will be adequate to absorb probable losses onexisting loans, based on an evaluation of the collectibility of loans in ourportfolio and prior loss experience. Three methods are used to evaluate theadequacy of the allowance for loan losses: (1) historical loss experience,based on loss experience by quality classification in the previous twelvecalendar quarters; (2) specific identification, based upon management’sassessment of loans in our portfolio and the probability that a charge off willoccur in the upcoming quarter; and (3) loan concentrations, based oncurrent or expected economic factors in the geographic and industry sectorswhere management believes we may eventually experience some loan losses. Thisevaluation also takes into consideration such factors as changes in the natureand volume of the loan portfolio, growth of the loan portfolio, the value ofunderlying collateral, overall portfolio quality, review of specific problemloans, and current economic conditions that may affect the borrower’s abilityto pay.

11

----

While management uses the best information availableto make its evaluation, future adjustments to the allowance may be necessary ifthere are significant changes in economic conditions. Management is in theprocess of analyzing the methodology used in determining the allowance for loanlosses which may result in future changes to the Company’s calculations andaccruals. In addition, as an integral part of their examination processregulatory agencies periodically review our allowance for loan losses and mayrequire us to make additions to the allowance based on their evaluation ofinformation available at the time of their examinations.

***Mortgage ServicingRight (MSR) Assets:***  Servicing residential mortgageloans for third-party investors represents a significant business activity ofthe Bank. As of March 31, 2006, mortgage loans serviced for others totaled$943.5 million. The MSRs on these loans total $9.5 million as of March 31,2006. The expected and actual rates of mortgage loan prepayments are the mostsignificant factors driving the value of MSRs. Increases in mortgage loanprepayments reduce estimated future net servicing cash flows because the lifeof the underlying loan is reduced. In determining the fair value of the MSRs,mortgage interest rates, which are used to determine prepayment rates anddiscount rates are held constant over the estimated life of the portfolio. Fairvalues of the MSRs are provided by an independent third-party broker of MSRs ona monthly basis. The values given by the broker are based upon current marketconditions and assumptions, which incorporate the expected life of the loans,estimated costs to service the loans, servicing fees to be received and otherfactors. MSRs are carried at the lower of the initial capitalized amount, netof accumulated amortization, or fair value.

The fair value of the MSRs is driven primarily by the effect current mortgage interest rates have on the likelihood borrowers will prepay the underlying mortgages by refinancing at a lower rate. Accordingly, higher interest rates decrease the likelihood of repayment, extending the life of the MSRs and increasing the value of these assets. Lower interest rates increase the likelihood of repayment, contracting the life of the MSRs and decreasing the value of these assets. This can have a significant impact on our income. There is no certainty on the direction and amount of interest rate changes looking forward, and therefore, there is no certainty on the amount or direction of the change in valuation.

An analysis of changes in mortgage servicing rights asset follows:
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005** | ** ** |
| ** **                                   | ** ** | **(In thousands)**          | ** ** |
| Balance at  beginning of period              |       | $                                | 11,009     |   | $ | 11,858 |   |
| Servicing rights  originated and capitalized |       | 317                              |       | 387 |   |
| Amortization                                 |       | (674                             | )          | (694 | ) |
|                                         |       | $                                | 10,652     |   | $ | 11,551 |   |

 

Below is an analysis of changes in the mortgage servicing right assetvaluation allowance:
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005** | ** ** |
| ** **                                   | ** ** | **(In thousands)**          | ** ** |
| Balance at  beginning of period              |       | $                                | (1,230     | ) | $ | (3,487 | ) |
| Aggregate  reductions credited to operations |       | 123                              |       | 643 |   |
| Aggregate  additions charged to operations   |       | —                           |       | (79 | ) |
|                                         |       | $                                | (1,107     | ) | $ | (2,923 | ) |

 

**Overview**

The Company’s net income for thefirst three months of 2006 was $267 thousand less than the net income for thesame period in 2005, a decrease of 11.3%. This was largely due to the provisionfor loan losses being $1.4 million higher in 2006 than in 2005, which wasprimarily as a result of the provision associated with a single commercial loan.Although this loan is currently performing, it was determined that due to aweakness in the financial position of this borrower that it was appropriate toprovide for and subsequently charge off a portion of this loan. The increase inprovision of $1.4 million was largely offset by an increase in net interestincome of $1.2 million during the first three months of 2006 when compared tothe same period in 2005. Total assets decreased slightly by $5.1 million (0.4%)from December 31, 2005 to March 31, 2006, with a shift in assets fromcash and investment securities to loans. Total deposits decreased $3.4 million(0.3%) during the same period.

12

----

**Results of Operations-Income StatementAnalysis**

               ***Net Income-General.***Netincome for the three months ended March 31, 2006 was $2.1 million,compared to $2.4 million for the same period of 2005. Diluted earnings pershare decreased by $0.03 to $0.32 for the three months ended March 31,2006 from $0.35 for the same period of 2005. This represented a decrease inearnings per share of 8.6%. This decrease was primarily due to anincrease in the provision for loan losses of $1.4 million from 2005 to 2006,which was largely due to the provision associated with a single commercial loan.This increase in provision was largely offset by an increase in net interestincome of $1.2 million, which was mostly due to an increase in both the volumeof average earning assets and the rate earned on those earning assets. Otherexpenses increased $735 thousand, largely due to a smaller decrease in thevaluation allowance on mortgage servicing rights and an increase in salariesand employee benefits. Non-interest income increased $336 thousand, primarilydue to an increase in title insurance premium income and a change in the netgain (loss) on the disposal of fixed assets. The effect of those items, net oftaxes, was a decrease in net income of $267 thousand for the first quarter of2006 compared to the same period in 2005.

The profitability of the Company’soperations depends primarily on its net interest income, which is the differencebetween total interest earned on interest earning assets and total interestpaid on interest bearing liabilities. The Company’s net income is affected byits provision for loan losses as well as other income and other expenses. Theprovision for loan losses reflects the amount thought to be adequate to coverprobable credit losses in the loan portfolio. Non-interest income or otherincome consists of mortgage loan servicing fees, loan and other fees, servicecharges on deposits, gain on sale of loans, gain on sale of securities andother operating income. Other expenses include salaries and employee benefits,occupancy expenses, data processing expenses, marketing, amortization andvaluation of mortgage servicing rights, supplies expense, loss on other realestate owned, postage and other expenses.

The amount of net interest incomeis affected by changes in the volume and mix of interest earning assets, thelevel of interest rates earned on those assets, the volume and mix of interestbearing liabilities, and the level of interest rates paid on those interestbearing liabilities. The provision for loan losses is dependent on changes inthe loan portfolio and management’s assessment of the collectibility of theloan portfolio, as well as economic and market conditions. Other income andother expenses are impacted by growth of operations and growth in the number ofaccounts through both acquisitions and core banking business growth. Growth inoperations affects other expenses as a result of additional employees, branchfacilities and promotional marketing expenses. Growth in the number of accountsaffects other income including service fees as well as other expenses such ascomputer services, supplies, postage, telecommunications and othermiscellaneous expenses.

13

----

                ***Net Interest Income.***Thefollowing tables present, for the periods indicated, the total dollar amount ofinterest income from average interest earning assets and the resultant yields,as well as the interest expense on average interest bearing liabilities, andthe resultant costs, expressed both in dollars and rates:
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | **Average  Balance**                                 | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands)**                 | ** ** |
| **Interest Earning Assets:**                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                                  |       | $                                                    | 1,037,684  |   | $ | 17,903 |   | 7.00 | % | $ | 921,441 |   | $ | 14,222 |   | 6.26 | % |
| Taxable  investment securities                                               |       | 100,363                                              |       | 991 |   | 4.00 |   | 89,509 |   | 656 |   | 2.97 |   |
| Investment  securities exempt from federal income taxes(3)                   |       | 18,889                                               |       | 324 |   | 6.96 |   | 17,288 |   | 281 |   | 6.59 |   |
| Federal funds  sold                                                          |       | 384                                                  |       | 3 |   | 3.17 |   | 708 |   | 4 |   | 2.29 |   |
| Other interest  bearing deposits                                             |       | 12,499                                               |       | 132 |   | 4.28 |   | 3,618 |   | 20 |   | 2.24 |   |
| Investment in  unconsolidated trust subsidiaries                             |       | 992                                                  |       | 22 |   | 8.99 |   | 682 |   | 16 |   | 9.51 |   |
| Total interest earning assets                                                |       | 1,170,811                                            |       | 19,375 |   | 6.71 |   | 1,033,246 |   | 15,199 |   | 5.97 |   |
| Non-interest earning assets                                                  |       | 59,778                                               |       |   |   |   |   | 69,706 |   |   |   |   |   |
| Total assets                                                                 |       | $                                                    | 1,230,589  |   |   |   |   |   | $ | 1,102,952 |   |   |   |   |   |
| **Interest Bearing Liabilities:**                                            |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| NOW and money market deposits                                           |       | $                                                    | 84,772     |   | $ | 362 |   | 1.73 | % | $ | 124,517 |   | $ | 326 |   | 1.06 | % |
| Savings deposits                                                             |       | 407,407                                              |       | 1,740 |   | 1.73 |   | 374,263 |   | 1,045 |   | 1.13 |   |
| Time deposits                                                                |       | 455,040                                              |       | 4,440 |   | 3.96 |   | 378,205 |   | 2,610 |   | 2.80 |   |
| Short-term  borrowings                                                       |       | 13,761                                               |       | 138 |   | 4.07 |   | 16,068 |   | 102 |   | 2.57 |   |
| Long-term  borrowings, including ESOP borrowings                             |       | 69,539                                               |       | 680 |   | 3.97 |   | 62,917 |   | 577 |   | 3.72 |   |
| Junior  subordinated debt owed to unconsolidated trusts                      |       | 32,992                                               |       | 728 |   | 8.95 |   | 22,682 |   | 519 |   | 9.28 |   |
| Total interest bearing liabilities                                           |       | 1,063,511                                            |       | 8,088 |   | 3.08 |   | 978,652 |   | 5,179 |   | 2.15 |   |
| Demand  deposits—non-interest bearing                                   |       | 39,811                                               |       |   |   |   |   | 45,955 |   |   |   |   |   |
| Other  non-interest bearing liabilities                                 |       | 49,477                                               |       |   |   |   |   | 5,968 |   |   |   |   |   |
| Stockholders’  equity, including stock owned by ESOP                    |       | 77,790                                               |       |   |   |   |   | 72,377 |   |   |   |   |   |
| Total liabilities and stockholders equity                                    |       | $                                                    | 1,230,589  |   |   |   |   |   | $ | 1,102,952 |   |   |   |   |   |
| Net interest income on a fully tax equivalent  basis/interest rate Spread(4) |       |                                                 |       | $ | 11,287 |   | 3.63 | % |   |   | $ | 10,020 |   | 3.82 | % |
| Net interest margin on a fully tax equivalent  basis(5)                      |       |                                                 |       |   |   | 3.91 | % |   |   |   |   | 3.93 | % |
| Net interest  margin(5)                                                      |       |                                                 |       |   |   | 3.87 | % |   |   |   |   | 3.89 | % |

----

(1)          Includes non-accrual loans of $8.1 million and$5.4 million for March 31, 2006 and 2005 respectively.

(2)          Interest income includes loan origination fees of$737 thousand and $682 thousand for the three months ended March 31, 2006and 2005, respectively.

(3)          Non-taxable investment income is presented on afully tax equivalent basis, adjusting for federal and state exemption ofinterest income and certain other permanent tax differences.

(4)          Interest rate spread represents the differencebetween the average yield on interest earning assets and the average cost ofinterest bearing liabilities and is presented on a fully tax equivalent basis.

(5)          Net interest margin represents net interest incomeas a percentage of average interest earning assets.

14

----

For the first quarter of 2006,net interest income on a fully tax equivalent basis increased $1.3 million to$11.3 million from $10.0 million for the first quarter of 2005. The increase innet interest income resulted from an increase in interest income on a fully taxequivalent basis of $4.2 million (27.5%), while interest expense increased $2.9million (56.2%). Interest income on a fully tax equivalent basis increased duein part to an increase in average earning assets of $137.6 million (13.3%),which accounted for $2.1 million of the increase. In addition, the yieldon earning assets on a fully tax equivalent basis increased 74 basis points,which accounted for another $2.1 million of the increase. Interest expense increasedprimarily due to an increase on the cost of interest-bearing liabilities of 93basis points, which accounted for $2.1 million of the increase. Averageinterest-bearing liabilities increased $84.9 million (8.7%), accounting for$851 thousand of the increase in interest expense. The net interest marginexpressed in a fully tax equivalent basis decreased 2 basis points to 3.91% forthe first three months of 2006 from 3.93% during the same period in 2005.

               ***Volume, Mix and RateAnalysis of Net Interest Income.***The following tables presentthe extent to which changes in volume, changes in interest rates, and changesin the interest rates times the changes in volume of interest earning assetsand interest bearing liabilities have affected our interest income and interestexpense during the periods indicated. Information is provided on changes ineach category due to: (i) changes attributable to changes in volume(change in volume times the prior period interest rate); (ii) changesattributable to changes in interest rate (changes in rate times the priorperiod volume); and (iii) changes attributable to changes in rate/volume(changes in interest rate times changes in volume). Changes attributable to thecombined impact of volume and rate have been allocated proportionally to thechanges due to volume and the changes due to rate:
| ** **                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006 Compared to 2005**             | ** ** |
| ** **                                                 | ** ** | **Change Due  to Volume**                  | ** ** | **Change Due  to Rate** | ** ** | **Total  Change** | ** ** |
| ** **                                                 | ** ** | **(In thousands)**                              | ** ** |
| **Interest  Earning Assets:**                              |       |                                                 |       |   |   |   |   |
| Loans                                                      |       | $                                                    | 1,904      |   | $ | 1,777 |   | $ | 3,681 |   |
| Taxable  investment securities                             |       | 86                                                   |       | 249 |   | 335 |   |
| Investment  securities exempt from federal income taxes(1) |       | 27                                                   |       | 16 |   | 43 |   |
| Federal funds  sold                                        |       | (3                                                   | )          | 2 |   | (1 | ) |
| Other interest  bearing deposits                           |       | 82                                                   |       | 30 |   | 112 |   |
| Investment in  unconsolidated trust subsidiaries           |       | 6                                                    |       | — |   | 6 |   |
| Total increase (decrease) in interest income               |       | 2,102                                                |       | 2,074 |   | 4,176 |   |
| **Interest  Bearing Liabilities:**                         |       |                                                 |       |   |   |   |   |
| NOW and money  market deposit accounts                     |       | (126                                                 | )          | 162 |   | 36 |   |
| Savings deposits                                           |       | 100                                                  |       | 595 |   | 695 |   |
| Time deposits                                              |       | 602                                                  |       | 1,228 |   | 1,830 |   |
| Short-term  borrowings                                     |       | (17                                                  | )          | 53 |   | 36 |   |
| Long-term  borrowings                                      |       | 63                                                   |       | 40 |   | 103 |   |
| Junior  subordinated debt owed to unconsolidated trusts    |       | 229                                                  |       | (20 | ) | 209 |   |
| Total increase (decrease) in interest expense              |       | 851                                                  |       | 2,058 |   | 2,909 |   |
| Increase  (decrease) in net interest income                |       | $                                                    | 1,251      |   | $ | 16 |   | $ | 1,267 |   |

----

(1)          Non-taxable investment income is presented on afully tax equivalent basis, adjusting for federal and state exemption ofinterest income and certain other permanent tax differences.

15

----

***Other Income.***Changes in other income between the three monthsended March 31, 2006 and 2005 were as follows:
| ** **                   | ** ** | **Three Months Ended** | ** ** | ** **               | ** ** |
|------------------------------|------------|----------------------------------|------------|--------------------------|------------|
| ** **                   | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005** | ** ** | **Net difference** | ** ** |
| ** **                   | ** ** | **(In thousands)**          | ** ** |
| Other income:                |       |                             |       |                     |       |   |   |
| Mortgage loan servicing fees |       | $                                | 640        |                     | $          | 602 |   | $ | 38 |   |
| Loan and other fees          |       | 709                              |       | 588                      |       | 121 |   |
| Service charges on deposits  |       | 381                              |       | 331                      |       | 50 |   |
| Gain on sale of loans        |       | 300                              |       | 463                      |       | (163 | ) |
| Other operating income       |       | 366                              |       | 76                       |       | 290 |   |
|                         |       | $                                | 2,396      |                     | $          | 2,060 |   | $ | 336 |   |

 

In the first quarter of 2006,other income increased by $336 thousand (16.3%) to $2.4 million from $2.1million for the first quarter of 2005. Other operating income increased $290thousand primarily due to an increase in title insurance premium income ($261thousand). Title insurance premiums increased due to an increased volume oftitle insurance business in both the Los Alamos and Santa Fe operations ofTitle Guaranty. Gain on sale of loans decreased $163 thousand due to thecontinued drop in mortgage loan refinancing activity and smaller premiumsrecognized on loans sold. This drop was expected in light of the FederalReserve’s actions in raising the federal funds rates 200 basis points betweenthe two periods, and was experienced across the financial services industry. Loansand other fees increased $121 thousand due to an increase in trust-related fees($56 thousand) and an increase in ATM switch fees ($29 thousand).

               ***Other Expenses.***Changesin other expenses between the three months ended March 31, 2006 and 2005were as follows:
| ** **                                               | ** ** | **Three Months Ended** | ** ** | ** **               | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|
| ** **                                               | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005** | ** ** | **Net difference** | ** ** |
| ** **                                               | ** ** | **(In thousands)**          | ** ** |
| Other expenses:                                          |       |                             |       |                     |       |   |   |
| Salaries and employee benefits                           |       | $                                | 4,425      |                     | $          | 4,058 |   | $ | 367 |   |
| Occupancy                                                |       | 857                              |       | 799                      |       | 58 |   |
| Data processing                                          |       | 468                              |       | 490                      |       | (22 | ) |
| Marketing                                                |       | 437                              |       | 324                      |       | 113 |   |
| Amortization and valuation of mortgage servicing  rights |       | 551                              |       | 130                      |       | 421 |   |
| Supplies                                                 |       | 201                              |       | 209                      |       | (8 | ) |
| Loss on sale of other real estate owned                  |       | 198                              |       | 518                      |       | (320 | ) |
| Postage                                                  |       | 157                              |       | 170                      |       | (13 | ) |
| Other                                                    |       | 1,099                            |       | 960                      |       | 139 |   |
|                                                     |       | $                                | 8,393      |                     | $          | 7,658 |   | $ | 735 |   |

 

For the first quarter of 2006,other expenses increased $735 thousand (9.6%) to $8.4 million in 2006 from $7.7million in the first quarter of 2005. Amortization and valuation of mortgageservicing rights increased $421 thousand due to the decrease in the valuationallowance of $564 thousand in 2005 compared to a decrease of only $123 thousandin 2006. Salaries and employee benefits increased $367 thousand (9.0%) dueto the expensing of stock options and stock appreciation rights for the firsttime as a result of changes in accounting standards ($73 thousand) and a shiftfrom lower-compensated employees to higher-compensated employees. This shift was due to an effort to hire and retainmore highly skilled employees in order to improve the efficiency of operations.Loss on sale of other real estate owned decreased $320 thousand (61.8%) due tolarge other real estate owned losses in 2005 that were not realized in 2006.

***IncomeTaxes.***In the first three months of 2006, income taxexpense decreased by $260 thousand (18.2%) from the previous year to a total of$1.2 million from $1.4 million. This was due in part to lower taxable income in2006 compared to 2005, as well as a lower effective tax rate (35.7% compared to37.6%). This lower effective tax rate was due to the exercise of stock optionsin the first quarter of 2006 that decreased taxable income, but not bookincome.

16

----

**Financial Condition-Balance SheetAnalysis**

***General.***Total assets at March 31, 2006 were $1.2 billion, adecrease of $5.1 million (0.4%) from December 31, 2005. Net loansincreased $31.0 million (3.1%) during 2006, cash and cash equivalents decreased$28.8 million (52.6%) and investments decreased $13.5 million (10.7%). Duringthe same period, total liabilities decreased slightly by $7.8 million (0.7%)remaining at $1.2 billion at March 31, 2006. The decrease in totalliabilities was primarily due to a decrease in total deposits of $3.4 million(0.3%) and a decrease in borrowings (including borrowings made by the EmployeeStock Ownership Plan) of $2.4 million (2.9%). Stockholders’ equity (includingstock owned by the Employee Stock Ownership Plan) increased $2.7 million (3.6%)to $78.3 million on March 31, 2006 compared to $75.6 million on December 31,2005.

               ***Investment Securities.***Theprimary purposes of the investment portfolio are to provide a source ofearnings, for liquidity management, to provide collateral to pledge againstpublic deposits and to control interest rate risk. In managing the portfolio,the Company seeks to obtain the objectives of safety of principal, liquidity,diversification and maximized return on funds. For an additional discussionwith respect to these matters, see “Liquidity and Sources of Capital” underItem 2 and “Asset Liability Management” under Item 3 below.

               The following tables set forth the amortized cost and fair value of securitiesby accounting classification category and by type of security as indicated:
| ** **                                                       | ** ** | **At March 31, 2006** | ** ** | **At December 31, 2005** | ** ** | **At March 31, 2005** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                       | ** ** | **Amortized  Cost**                  | ** ** | **Fair Value**                     | ** ** | **Amortized  Cost**                  | ** ** | **Fair Value** | ** ** | **Amortized  Cost** | ** ** | **Fair Value** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**              | ** ** |
| Investment securities  Available for Sale:                       |       |                                 |       |                                    |       |                                 |       |   |   |   |   |   |   |
| U.S. Government agencies                                         |       | $                                    | 80,290     |                                    | $          | 79,793                               |       | $ | 85,687 |   | $ | 85,289 |   | $ | 40,088 |   | $ | 39,616 |   |
| States and political subdivisions                                |       | 5,973                                |       | 5,931                                   |       | 5,984                                |       | 5,937 |   | 2,198 |   | 2,165 |   |
| Equity securities                                                |       | 1                                    |       | 5                                       |       | 1                                    |       | 5 |   | 1 |   | 5 |   |
| Total investment securities available for sale                   |       | $                                    | 86,264     |                                    | $          | 85,729                               |       | $ | 91,672 |   | $ | 91,231 |   | $ | 42,287 |   | $ | 41,786 |   |
| Investment securities  Held to Maturity:                         |       |                                 |       |                                    |       |                                 |       |   |   |   |   |   |   |
| U.S. Government agencies                                         |       | $                                    | 5,521      |                                    | $          | 5,504                                |       | $ | 13,687 |   | $ | 13,647 |   | $ | 37,324 |   | $ | 37,305 |   |
| States and political subdivisions                                |       | 12,836                               |       | 12,827                                  |       | 12,925                               |       | 12,918 |   | 15,053 |   | 15,079 |   |
| Total investment securities held to maturity                     |       | $                                    | 18,357     |                                    | $          | 18,331                               |       | $ | 26,612 |   | $ | 26,565 |   | $ | 52,377 |   | $ | 52,384 |   |
| Other investments:                                               |       |                                 |       |                                    |       |                                 |       |   |   |   |   |   |   |
| Non-marketable equity securities (including FRB and  FHLB stock) |       | $                                    | 7,278      |                                    | $          | 7,278                                |       | $ | 6,973 |   | $ | 6,973 |   | $ | 6,639 |   | $ | 6,639 |   |
| Investment in unconsolidated trusts                              |       | 992                                  |       | 992                                     |       | 992                                  |       | 992 |   | 682 |   | 682 |   |
| Total other investments                                          |       | $                                    | 8,270      |                                    | $          | 8,270                                |       | $ | 7,965 |   | $ | 7,965 |   | $ | 7,321 |   | $ | 7,321 |   |

 

                ***LoanPortfolio.***The following tables set forth the composition of theloan portfolio:
| ** **                 | ** ** | **At March 31, 2006** | ** ** | **At December 31, 2005** | ** ** | **At March 31, 2005** | ** ** |
|----------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **Amount**                           | ** ** | **Percent**                             | ** ** | **Amount**                           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                 |       | $                                    | 96,298     |                                    | 9.15       | %                                    | $          | 93,579 |   | 9.16 | % | $ | 93,549 |   | 9.99 | % |
| Commercial real  estate    |       | 387,940                              |       | 36.84                                   |       | 379,884                              |       | 37.19 |   | 365,805 |   | 39.09 |   |
| Residential real  estate   |       | 317,210                              |       | 30.12                                   |       | 313,693                              |       | 30.71 |   | 288,515 |   | 30.82 |   |
| Construction  real estate  |       | 197,307                              |       | 18.74                                   |       | 178,068                              |       | 17.43 |   | 136,375 |   | 14.57 |   |
| Installment and  other     |       | 54,238                               |       | 5.15                                    |       | 56,309                               |       | 5.51 |   | 51,770 |   | 5.53 |   |
| Total loans                |       | 1,052,993                            |       | 100.00                                  |       | 1,021,533                            |       | 100.00 |   | 936,014 |   | 100.00 |   |
| Unearned income            |       | (2,326                               | )          |                                    |       | (2,153                               | )          |   |   | (2,287 | ) |   |   |
| Gross loans                |       | 1,050,667                            |       |                                    |       | 1,019,380                            |       |   |   | 933,727 |   |   |   |
| Allowance for  loan losses |       | (9,256                               | )          |                                    |       | (8,842                               | )          |   |   | (8,689 | ) |   |   |
| Net loans                  |       | $                                    | 1,041,411  |                                    |       |                                 | $          | 1,010,538 |   |   |   | $ | 925,038 |   |   |   |

 

17

----

                Net loans increased $116.4 million (12.6%) to $1.0 billion at March 31,2006 from $925.0 million at March 31, 2005. The increase was dueprimarily to growth in the Company’s construction real estate, residential realestate and commercial real estate loan portfolios. This growth as been due to acombination of a strengthening local economy, more activity generated from ournewest Santa Fe office and increased marketing of our loan products.

**               *Asset Quality.***The following table sets forth the amounts ofnon-performing loans and non-performing assets at the dates indicated:
| ** **                                                    | ** ** | **At  March 31,  2006**         | ** ** | **At   December 31,  2005** | ** ** | **At  March 31,  2005** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Non-accruing  loans                                           |       | $                                    | 8,468      |                                  | $          | 8,037                        |       | $ | 5,580 |   |
| Loans  90 days or more past due, still accruing interest |       | —                               |       | —                                |       | 4                            |       |
| Total non-performing  loans                                   |       | 8,468                                |       | 8,037                                 |       | 5,584                        |       |
| Other real  estate owned                                      |       | 290                                  |       | 375                                   |       | 3,523                        |       |
| Other  repossessed assets                                     |       | 79                                   |       | 27                                    |       | 19                           |       |
| Total  non-performing assets                                  |       | $                                    | 8,837      |                                  | $          | 8,439                        |       | $ | 9,126 |   |
| Total  non-performing loans to total loans                    |       | 0.80                                 | %          | 0.79                                  | %          | 0.60                         | %          |
| Allowance for  loan losses to non-performing loans            |       | 109.31                               | %          | 110.02                                | %          | 155.61                       | %          |
| Total non-performing  assets to total assets                  |       | 0.71                                 | %          | 0.68                                  | %          | 0.80                         | %          |

 

               At March 31, 2006, total non-performing assets decreased $289 thousand(3.2%) to $8.8 million from $9.1 million at March 31, 2005 due todecreases in other real estate owned of $3.2 million, which was partiallyoffset by increases in non-performing loans of $2.9 million. The decreases inother real estate owned was primarily due to the sale of two large residentialproperties held in other real estate owned totaling $3.0 million. Non-performingloans increased primarily due to a $5.8 million commercial loan that was placedon non-accrual status in 2005 (of which $1.5 million was charged off and $200thousand received in payment) and an $830 thousand commercial loan that wasplaced on non-accrual status in 2006. This was partially offset by a $2.4million commercial real estate loan that was on non-accrual status on March 31,2005 but collected in full by the end of 2005.

               At March 31, 2006, total non-performing assets increased $398 thousand(4.7%) to $8.8 million from $8.4 million at December 31, 2005, primarilydue to increases in non-performing loans of $431 thousand, due to $1.4 millionin loans being placed on non-accrual, which was partially offset by $968thousand being charged off or paid on existing non-accrual loans.

*Allowance for Loan Losses.*Management believes the allowance for loan lossesaccounting policy is critical to the portrayal and understanding of the Company’sfinancial condition and results of operations. As such, selection andapplication of this “critical accounting policy” involves judgments, estimates,and uncertainties that are susceptible to change. In the event that differentassumptions or conditions were to prevail, and depending upon the severity ofsuch changes, the possibility of materially different financial condition orresults of operations is a reasonable likelihood.

The allowance for loan losses ismaintained at an amount that management believes will be adequate to absorbprobable losses on existing loans, based on an evaluation of the collectibilityof loans and prior loss experience. This evaluation also takes intoconsideration such factors as changes in the nature and volume of the loanportfolio, the value of underlying collateral, overall portfolio quality,review of specific problem loans and current economic conditions that mayaffect the borrower’s ability to pay. While management uses the best informationavailable to make its evaluation, future adjustments to the allowance may benecessary if there are significant changes in economic conditions. Managementis in the process of analyzing the methodology used in determining theallowance for loan losses which may result in future changes to the Company’scalculations and accruals. In addition, asan integral part of their examination process, regulatory agencies periodicallyreview the Company’s allowance for loan losses and may require the Company tomake additions to the allowance based on their evaluation of informationavailable at the time of their examinations.

18

----

               The following table presents an analysis of the allowance for loan losses forthe periods presented:
| ** **                                    | ** ** | **Three Months Ended**     | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **March 31,  2006**             | ** ** | **March 31,  2005** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Balance at  beginning of period               |       | $                                    | 8,842      |   | $ | 8,367 |   |
| Provision for  loan losses                    |       | 1,900                                |       | 525 |   |
| Charge-offs                                   |       | (1,569                               | )          | (238 | ) |
| Recoveries                                    |       | 83                                   |       | 35 |   |
| Net charge-offs                               |       | (1,486                               | )          | (203 | ) |
| Balance at end  of period                     |       | $                                    | 9,256      |   | $ | 8,689 |   |
| Gross loans at  end of period                 |       | $                                    | 1,050,667  |   | $ | 933,727 |   |
| Ratio of  allowance to total loans            |       | 0.88                                 | %          | 0.93 | % |
| Ratio of net  charge-offs to average loans(1) |       | 0.58                                 | %          | 0.09 | % |

----

(1)           Net charge-offs are annualized forthe purposes of this calculation.

               Net charge-offs for the three months ended March 31, 2006 totaled $1.5million, an increase of $1.3 million (632.0%) from $203 thousand from the threemonths ended March 31, 2005. The majority of the charge-offs werecommercial loans. Additionally the provision for loan losses increased for thethree months ended March 31, 2006 from the three months ended March 31,2005, due to management’s analysis of current non-performing loans. Specifically,$1.0 million of the additional provision was made for a single large commercialloan, of which $950 thousand was subsequently charged-off.

               The following table sets forth the allocation of the allowance for loan lossesin each loan category for the periods presented and the percentage of loans ineach category to total loans. An allocation for a loan classification is onlyfor internal analysis of the adequacy of the allowance and is not an indicationof expected or anticipated losses:
| ** **                              | ** ** | **At March 31, 2006** | ** ** | **At December 31, 2005** | ** ** | **At March 31, 2005** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **Amount**                           | ** ** | **Percent**                             | ** ** | **Amount**                           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                              |       | $                                    | 3,266      |                                    | 9.15       | %                                    | $          | 2,934 |   | 9.16 | % | $ | 4,398 |   | 9.99 | % |
| Commercial and  residential real estate |       | 2,581                                |       | 66.96                                   |       | 3,086                                |       | 67.90 |   | 2,508 |   | 69.91 |   |
| Construction  real estate               |       | 2,381                                |       | 18.74                                   |       | 1,993                                |       | 17.43 |   | 995 |   | 14.57 |   |
| Installment and  other                  |       | 1,001                                |       | 5.15                                    |       | 813                                  |       | 5.51 |   | 754 |   | 5.53 |   |
| Unallocated                             |       | 27                                   |       | N/A                                     |       | 16                                   |       | N/A |   | 34 |   | N/A |   |
| Total                                   |       | $                                    | 9,256      |                                    | 100.00     | %                                    | $          | 8,842 |   | 100.00 | % | $ | 8,689 |   | 100.00 | % |

----

N/A—not applicable

               The portion of the allocation that was based upon historical loss experiencedecreased by $847 thousand (35.6%) in 2006, from $2.4 million on March 31,2005 to $1.5 million on March 31, 2006. This was largely due to a decreasein the allocation for commercial loans of $934 thousand and a decrease in theallocation for construction real estate loans of $394 thousand. These decreaseswere partially offset by an increase in the allocation for installment andother loans of $493 thousand. Concentration allocation increased $882 thousand(15.7%), from $5.6 million on March 31, 2005 to $6.5 million on March 31,2006. This was due to an increase in the allocation for construction realestate loans of $1.8 million, which was partially offset by a lower allocationin commercial loans of $981 thousand. The allocation for specificallyidentified loans increased by $538 thousand (81.0%), from $664 thousand on March 31,2005 to $1.2 million on March 31, 2006. Two commercial loans totaling $1.2million accounted for this increase, which was partially offset by decreases inall other categories.

19

----

We expect continued growth in our loan portfolio dueto a stable local economy, a stabilized Laboratory budget of over $2.2 billionand anticipated continued increases in interest rates. We anticipate the volumeof commercial real estate and construction loans to increase as theconstruction industry strengthens and the New Mexico economy continues toimprove by attracting new business to the state. Commercial real estate hasstrengthened over the past several years due to vacancy rates returning totheir historical averages and demand picking up due to new business looking toexpand within the state. The housing market for homes below $500 thousand remainsstrong and we believe that market will remain constant in the near future. Weexpect residential real estate for property worth greater than $1.5 million tocontinue to be soft. Total net charge-offs were substantially more in the firstthree months of 2006 than in the same period in 2005. This was primarily due toan increase in commercial charge-offs in 2006 due to the single largecommercial loan discussed above.

Additions to the allowance for loan losses, which arecharged to earnings through the provision for loan losses, are determined basedon a variety of factors, as indicated above. Although we believe the allowancefor loan losses is sufficient to cover probable losses inherent in the loanportfolio, there can be no assurance that the allowance will prove sufficientto cover actual loan losses.

*Potential Problem Loans.*TheCompany utilizes an internal asset classification system as a means ofreporting problem and potential problem assets. At scheduled Board of Directorsmeetings every quarter, a list of total adversely classified assets ispresented, showing OREO, other repossessed assets, and all loans listed as “Substandard,”“Doubtful” and “Loss.”  All non-accrual loans are classed either as “Substandard”or “Doubtful” and are thus included in total adversely classified assets. Aseparate watch list of loans classified as “Special Mention” is also presented.An asset is classified Substandard if it is inadequately protected by thecurrent net worth and paying capacity of the obligor or of the collateralpledged, if any. Substandard assets include those characterized by the distinctpossibility that the Company will sustain some loss if the deficiencies are notcorrected. Assets classified as Doubtful have all the weaknesses inherent inthose classified Substandard with the added characteristic that the weaknessespresent make collection or liquidation in full, on the basis of currentlyexisting facts, conditions and values, highly questionable and improbable.Assets classified as Loss are those considered uncollectible and viewed asnon-bankable assets, worthy of charge-off. Assets that do not currently exposethe Company to sufficient risk to warrant classification in one of theaforementioned categories, but possess weaknesses that may or may not be withinthe control of the customer are deemed to be Special Mention.

The Company’s determination as to the classificationof its assets and the amount of its valuation allowances is subject to reviewby the Bank’s primary regulators, which can order the establishment ofadditional general or specific loss allowances. The Comptroller of theCurrency, in conjunction with the other federal banking agencies, has adoptedan interagency policy statement on the allowance for loan losses. The policystatement provides guidance for financial institutions on both theresponsibilities of management for the assessment and establishment of adequateallowances and guidance for banking agency examiners to use in determining theadequacy of general valuation guidelines. Generally, the policy statementrecommends that (i) institutions have effective systems and controls toidentify, monitor and address asset quality problems; (ii) management hasanalyzed all significant factors that affect the collectibility of the portfolioin a reasonable manner; and (iii) management has established acceptableallowance evaluation processes that meet the objectives set forth in the policystatement. Management believes it has established an adequate allowance forprobable loan losses. The Company analyzes its process regularly, withmodifications made, if needed, and reports those results quarterly at Board ofDirectors meetings. However, there can be no assurance that regulators, inreviewing the Company’s loan portfolio, will not request the Company tomaterially increase its allowance for loan losses. Although management believesthat adequate specific and general loan loss allowances have been established,actual losses are dependent upon future events and, as such, further additionsto the level of specific and general loan loss allowances may become necessary.

               The following table shows the amounts of adversely classified assets andspecial mention loans as of the periods indicated:
| ** **                         | ** ** | **At  March 31,  2006**         | ** ** | **At  December 31,  2005** | ** ** | **At  March 31,   2005** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Loans classified as:               |       |                                 |       |                            |       |                               |       |
| Substandard                        |       | $                                    | 14,352     |                            | $          | 14,484                             |       | $ | 12,431 |   |
| Doubtful                           |       | 1,248                                |       | 1,414                           |       | 546                                |       |
| Total adversely  classified loans  |       | 15,600                               |       | 15,898                          |       | 12,977                             |       |
| Other real  estate owned           |       | 290                                  |       | 375                             |       | 3,523                              |       |
| Other  repossessed assets          |       | 79                                   |       | 27                              |       | 19                                 |       |
| Total adversely  classified assets |       | $                                    | 15,969     |                            | $          | 16,300                             |       | $ | 16,519 |   |
| Special mention loans              |       | $                                    | 11,383     |                            | $          | 14,836                             |       | $ | 23,713 |   |

 

20

----

              Total adversely classified assets decreased $550 thousand (3.3%) from March 31,2005 to March 31, 2006. The main reason for the decrease was a decrease of$3.2 million in other real estate owned. This was partially offset by anincrease in substandard loans of $1.9 million and an increase in doubtful loansof $702 thousand. Special mention loans decreased $12.3 million (52.0%) betweenMarch 31, 2005 and March 31, 2006, primarily due to a reduction ofcommercial real estate loans residing in the risk category.

**               Sources of Funds**

***                 Liquidity and Sources of Capital***

               The Company’s cash flows are comprised of three classifications: cash flowsfrom operating activities, cash flows from investing activities and cash flowsfrom financing activities. Net cash (used in) provided by operating activitieswas $(1.1) million and $5.0 million for the three months ended March 31,2006 and 2005 respectively. Net cash provided by operating activities decreased$6.1 million in the first three months of 2006 compared to the first threemonths of 2005 largely due to an increase in the origination of loans held forsale, net of sales, by $8.0 million over the first three months of 2005. Thiswas partially offset by a decrease in cash used by other assets of $1.8 million.Net cash used in investing activities was $(19.6) million and $(26.0) millionfor the three months ended March 31, 2006 and 2005, respectively. The $6.4million decrease in cash used by investing activities was largely due to a dropin loans funded, net of repayments, of $7.3 million. Net cash (used in)provided by financing activities was $(8.0) million and $58.7 million for thethree months ended March 31, 2006 and 2005, respectively. The $66.7million decrease in cash provided by financing activities was mainly due to adecrease in new deposit growth of $84.9 million from the first three months of2006 compared to the first three months of 2005, which was partially offset bya decrease in cash used by borrowings (net of repayments) of $14.3 million anda decrease in the purchase of treasury stock of $3.7 million.

In the event that additional short-term liquidity isneeded, we have established relationships with several large regional banks toprovide short-term borrowings in the form of federal funds purchases. We haveborrowed, and management believes that we could again borrow,$94.0 million for a short time from these banks on a collective basis.Additionally, we are a member of the FHLB and have the ability to borrow fromthe FHLB. As a contingency plan for significant funding needs, theAsset/Liability Management committee may also consider the sale of investmentsecurities, selling securities under agreement to repurchase, sale of certainloans and/or the temporary curtailment of lending activities.

At March 31, 2006, theCompany’s total risk-based capital ratio was 11.69%, the Tier 1 capital torisk-weighted assets ratio was 10.22%, and the Tier 1 capital to average assetsratio was 8.49%. At December 31, 2005, the Company’s total risk-basedcapital ratio was 11.67%, the Tier 1 capital to risk-weighted assets ratio was10.10%, and the Tier 1 capital to average assets ratio was 8.19%.

At March 31, 2006, the Bank’stotal risk-based capital ratio was 11.37%, the Tier 1 capital to risk-weightedassets ratio was 10.46%, and the Tier 1 capital to average assets ratio was8.69%. At December 31, 2005, the Bank’s total risk-based capital ratio was11.30%, the Tier 1 capital to risk-weighted assets ratio was 10.41%, and theTier 1 capital to average assets ratio was 8.43%. The Bank was categorized as “well-capitalized”under Federal Deposit Insurance Corporation regulations at March 31, 2006and December 31, 2005.

At March 31, 2006 and December 31,2005, the Company’s book value per common share was $11.88 and $11.54,respectively.

**Item 3. Quantitativeand Qualitative Disclosures About Market Risk**

**Asset Liability Management**

The Company’s net interest incomeis subject to “interest rate risk” to the extent that it can vary based onchanges in the general level of interest rates. It is the Company’s policy tomaintain an acceptable level of interest rate risk over a range of possiblechanges in interest rates while remaining responsive to market demand for loanand deposit products. The strategy employed by the Company to manage itsinterest rate risk is to measure its risk using an asset/liability simulationmodel and adjust the maturity of securities in its investment portfolio tomanage that risk.

Interest rate risk can also bemeasured by analyzing the extent to which the repricing of assets and liabilitiesare mismatched to create an interest sensitivity “gap”. An asset or liabilityis said to be interest rate sensitive within a specific time period if it willmature or reprice within that time period. The interest rate sensitivity gap isdefined as the difference between the amount of interest earning assetsmaturing or repricing within a specific time period and the amount of interestbearing liabilities maturing or repricing within that same time period. A gapis considered positive when the amount of interest rate sensitive assetsexceeds the amount of interest rate sensitive liabilities. A gap is considerednegative when the amount of interest rate sensitive liabilities exceeds theamount of interest rate sensitive assets. During a period of rising interestrates, therefore, a negative gap would tend to adversely affect net interestincome. Conversely, during a period of falling interest rates, a negative gapposition would tend to result in an increase in net interest income.

21

----

The following table sets forth the amounts of interest earning assetsand interest bearing liabilities outstanding at March 31, 2006, which areanticipated by the Company, based upon certain assumptions, to reprice ormature in each of the future time periods shown. Except as stated below, theamount of assets and liabilities shown which reprice or mature during aparticular period were determined based on the earlier of the term to repricingor the term to repayment of the asset or liability. The table is intended toprovide an approximation of the projected repricing of assets and liabilitiesat March 31, 2006 on the basis of contractual maturities and scheduledrate adjustments within a three-month period and subsequent selected timeintervals. The loan amounts in the table reflect principal balances expected tobe reinvested and/or repriced as a result of contractual amortization and rateadjustments on adjustable-rate loans. Loan and investment securitiescontractual maturities and amortization reflect modest prepayment assumptions. WhileNOW, money market and savings deposit accounts have adjustable rates, it isassumed that the interest rates on these accounts will not adjust immediatelyto changes in other interest rates. Therefore, the table is calculated assumingthat these accounts will reprice based upon an historical analysis of ratechanges of these particular accounts, with repricing assigned to these accountsfrom one to 11 months.
| ** **                                              | ** ** | **Time to Maturity or Repricing** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **As of March 31, 2006:**           | ** ** | **0-90 Days**                                    | ** ** | **91-365 Days** | ** ** | **1-5 Years** | ** ** | **Over 5 Years** | ** ** | **Total** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands)**                  | ** ** |
| **Interest Earning Assets:**                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Loans                                                   |       | $                                                     | 494,196    |   | $ | 444,052 |   | $ | 58,225 |   | $ | 54,194 |   | $ | 1,050,667 |   |
| Loans held for  sale                                    |       | 15,183                                                |       | — |   | — |   | — |   | 15,183 |   |
| Investment  securities                                  |       | 16,295                                                |       | 38,750 |   | 48,128 |   | 8,191 |   | 111,364 |   |
| Securities  purchased under agreements to resell        |       | 56                                                    |       | — |   | — |   | — |   | 56 |   |
| Interest bearing  deposits with banks                   |       | 3,677                                                 |       | — |   | — |   | — |   | 3,677 |   |
| Investment in  unconsolidated trusts                    |       | 186                                                   |       | — |   | — |   | 806 |   | 992 |   |
| Total interest earning assets                           |       | $                                                     | 529,593    |   | $ | 482,802 |   | $ | 106,353 |   | $ | 63,191 |   | $ | 1,181,939 |   |
| **Interest Bearing Liabilities:**                       |       |                                                  |       |   |   |   |   |   |   |   |   |
| NOW and money  market deposit accounts                  |       | $                                                     | 126,605    |   | $ | 115,172 |   | — |   | — |   | $ | 241,777 |   |
| Savings deposits                                        |       | 169,018                                               |       | 87,081 |   | — |   | — |   | 256,099 |   |
| Time deposits                                           |       | 137,097                                               |       | 223,103 |   | 87,159 |   | 1,897 |   | 449,256 |   |
| Short- and  long-term borrowings                        |       | 1,993                                                 |       | 14,735 |   | 18,919 |   | 44,685 |   | 80,332 |   |
| Borrowings made  by ESOP to outside parties             |       | 743                                                   |       | — |   | — |   | — |   | 743 |   |
| Junior  subordinated debt owed to unconsolidated trusts |       | 6,186                                                 |       | — |   | — |   | 26,806 |   | 32,992 |   |
| Total interest bearing liabilities                      |       | $                                                     | 441,642    |   | $ | 440,091 |   | $ | 106,078 |   | $ | 73,388 |   | $ | 1,061,199 |   |
| Rate sensitive  assets (RSA)                            |       | $                                                     | 529,593    |   | $ | 1,012,395 |   | $ | 1,118,748 |   | $ | 1,181,939 |   | $ | 1,181,939 |   |
| Rate sensitive  liabilities (RSL)                       |       | 441,642                                               |       | 881,733 |   | 987,811 |   | 1,061,199 |   | 1,061,199 |   |
| Cumulative GAP  (GAP=RSA-RSL)                           |       | 87,951                                                |       | 130,662 |   | 130,937 |   | 120,740 |   | 120,740 |   |
| RSA/Total assets                                        |       | 42.75                                                 | %          | 81.72 | % | 90.30 | % | 95.40 | % | 95.40 | % |
| RSL/Total assets                                        |       | 35.65                                                 | %          | 71.17 | % | 79.73 | % | 85.66 | % | 85.66 | % |
| GAP/Total assets                                        |       | 7.10                                                  | %          | 10.55 | % | 10.57 | % | 9.74 | % | 9.74 | % |
| GAP/RSA                                                 |       | 16.61                                                 | %          | 12.91 | % | 11.70 | % | 10.22 | % | 10.22 | % |

 

               Certain shortcomings are inherent in the method of analysis presented in theforegoing table. For example, although certain assets and liabilities may havesimilar maturities or periods to repricing, they may react in different degreesto changes in market interest rates. Also, the interest rates on certain typesof assets and liabilities may fluctuate in advance of changes in marketinterest rates, while interest rates on other types of assets may lag behindchanges in market rates. Additionally, in the event of a change in interestrates, prepayment and early withdrawal levels would likely deviatesignificantly from those assumed in calculating the table. Therefore, we do notrely solely on a gap analysis to manage our interest rate risk, but rather weuse what we believe to be the more reliable simulation model relating tochanges in net interest income.

22

----

               Based on simulation modeling at March 31, 2006 and December 31, 2005,our net interest income would change over a one-year time period due to changesin interest rates as follows:

**Change in Net Interest Income Over One Year Horizon**
| **Changes in Levels of** | ** ** | **At March 31, 2006** | ** ** | **At December 31, 2005** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| **Interest Rates**                 | ** ** | **Dollar Change**               | ** ** | **Percentage Change**              | ** ** | **Dollar Change** | ** ** | **Percentage Change** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| + 2.00                                  | %          | $                                    | (3,357     | )                                       | (7.50      | )% | $ | (3,093 | ) | (7.21 | )% |
| + 1.00                                  |       | (591                                 | )          | (1.32                                   | )          | (948 | ) | (2.21 | ) |
| (1.00                                   | )          | 1,020                                |       | 2.28                                    |       | 1,047 |   | 2.44 |   |
| (2.00                                   | )          | 1,137                                |       | 2.54                                    |       | 721 |   | 1.68 |   |
|                                         |            |                                      |            |                                         |            |  |  |  |  |  |  |

 

               Our simulations used assume the following:

1.           Changes in interest rates are immediate.

2.           It is our policy that interest rate exposure dueto a 2% interest rate rise or fall be limited to 15% of our annual net interestincome, as forecasted by the simulation model. As demonstrated by the tableabove, our interest rate risk exposure was within this policy at March 31,2006.

               Changes in net interest income between the periods above reflect changes in thecomposition of interest earning assets and interest bearing liabilities,related interest rates, repricing frequencies, and the fixed or variablecharacteristics of the interest earning assets and interest bearing liabilities.Projections of income given by the model are not actual predictions, but rathershow our relative interest rate risk. Actual interest income may vary frommodel projections.

**Item 4. Controls andProcedures.**

**Evaluation of Disclosure Controls and Procedures**

We have establisheddisclosure controls and procedures to ensure that material information relatingto the Company, including its consolidated subsidiaries, is made known to theofficers who certify our financial reports and to other members of seniormanagement and the board of directors and to ensure that information that isrequired to be disclosed in reports we file with the SEC is properly and timelyrecorded, processed, summarized and reported. A review and evaluation wasperformed by our management, including the Company’s Chief Executive Officer(the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness ofthe design and operation of our disclosure controls and procedures as of March 31,2006 pursuant to Rule 13a-15(b) under the Securities ExchangeAct of 1934. Based upon and as of the date of that review and evaluation, theCEO and CFO have concluded that our current disclosure controls and procedureswere effective as of March 31, 2006.

**Changes in Internal Control over Financial Reporting.**

There have been no changes to our internal controlover financial reporting during the last fiscal quarter that have affected, orare reasonably likely to affect, our internal control over financial reporting.

23

----

**PART II —OTHER INFORMATION**

**Item 1.  Legal Proceedings**

               Neither Trinity, the Bank, Title Guaranty, TCC Appraisal Services, TCC Advisorsor TCC Funds are involved in any pending legal proceedings other than routinelegal proceedings occurring in the normal course of business, which, in theopinion of management, in the aggregate, are material to our consolidatedfinancial condition.

**Item 1A. RiskFactors**

In addition to the other information in this QuarterlyReport on Form 10-Q, shareholders or prospective investors shouldcarefully consider the risk factors appearing in Trinity’s Form 10-Kfor the year-ending 2005 filed with the Securities and Exchange Commission on March 16,2006 beginning on page 9. There have been no material changes to the riskfactors as previously disclosed in Trinity’s Form 10-K.

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds**

**               **None

**Item 3. DefaultsUpon Senior Securities**

               None

**Item 4. Submissionof Matters to a Vote of Security Holders**

               None

**Item 5. OtherInformation**

               None

**Item 6. Exhibits**

31.1       Certification of ChiefExecutive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

31.2       Certification of ChiefFinancial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1       Certification of ChiefExecutive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

32.2       Certification of ChiefFinancial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

**SIGNATURES**

               Pursuant to the requirements of Section 12 of the Securities Exchange Actof 1934, the registrant has duly caused this registration statement to besigned on its behalf by the undersigned, thereunto duly authorized.
|                          | **TRINITY CAPITAL CORPORATION** |
|--------------------------|---------------------------------|
|                     |                            |   |
|                     |                            |   |
|                     |                            |   |
| Date:  May 10, 2006 | By:                             | /s/  WILLIAM C. ENLOE |
|                     |                            | William C.  Enloe |
|                     |                            | President and  Chief Executive Officer |
|                     |                            |   |
| Date: May 10,  2006 | By:                             | /s/ DANIEL R.  BARTHOLOMEW |
|                     |                            | Daniel R.  Bartholomew |
|                     |                            | Chief Financial  Officer |

 

24

----